Catalin Pora

OCR transcription for search; preserved printed pages are authoritative

UNITED STATES BANKRUPTCY COURT

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For The Northern District Of California

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GPO

Entered on Docket
October 17, 2006

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

FILED

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

In re Case No. 05-58969-ASW

]
]
Catalin Pora, ] Chapter 13
]
Debtor ]
]

MEMORANDUM DECTSTON
SUSTAINING OBJECTION TO CONFIRMATION OF PLAN

Before the Court is the Chapter 13 Trustee’s Amended Objection
to Confirmation of Plan (“Objection”). The debtor, Catalin Pora
(“Debtor”), filed his Chapter 13 plan (*Plan”) on October 15. 2005.
The Chapter 13 Trustee (“Trustee”) filed the Objection on January
17, 2006.

The Trustee in this case is Devin Derham-Burk. Cathleen Cooper
Moran, Esq. of Moran Law Group, Inc., represents Debtor.

The Court held a hearing on the Objection on June 23, 2006, and
took the matter under submission. The Court now makes the
following findings of fact and conclusions of law, pursuant to Rule

7052 of the Federal Rules of Bankruptcy Procedure.

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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I.

STATEMENT OF FACTS

The relevant facts necessary to decide the issues are
undisputed. The Debtor filed a voluntary Chapter 13 petition,
along with the requisite schedules and the Plan on October 15,
2005. The Plan proposes payments of $90 per month for 36 months,
resulting in total Plan receipts of $3,240. After payment of
administrative claims and Trustee’s fees, disbursements to general
unsecured creditors under the Plan will be approximately $1,438.'
Debtor has unsecured non-priority claims, excluding student loans,
of $23,941.07. The proposed dividend to the these unsecured non-
priority creditors is approximately 6%.

Debtor has student loan indebtedness of approximately
$27,116.23. These are also unsecured non-priority debts. Debtor
proposes to separately classify the student loans debts under
11 U.S.C. § 1322(b)(5)° and to pay these creditors outside of the
Plan according to contract terms at a rate of approximately $293.06
per month. At this rate, the student loan creditors would receive
a total of $10,550.06 over the term of the plan ~- an amount equal
to approximately 39%? of the total student loan balance.

If the student loans are classified together with the other

non-priority unsecured debts, the total amount of non-priorizy

'This amount is subject to change depending upon the
resolution of the amount of priority taxes owed to the IRS.

* unless otherwise noted, all statutory references are to

Title 11, United States Code (the Bankruptcy Code), as it existed
when Debtor filed this bankruptcy petition on October 15, 2005.

> ($293.06*36 months) = ($10,550.06/$27,116.23)*100 = 39%

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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unsecured debt would rise to $51,057.30.4 If the proposed monthly
payments on the student loans are added to the Plan payments, the
total amount distributed to unsecured creditors would be
approximately $11,986 ($10,550.06 + $1,438.00). Accordingly, the
dividend to unsecured creditors would rise to approximately 23%.°
The Trustee objects to the Plan, alleging that the proposed
treatment of the student loan debt unfairly discriminates against
the other non-priority unsecured creditors in violation of
§ 1322(b) (1). Specifically, the Trustee contends that the separate
classification of the non-dischargeable unsecured student loan debt
from the other dischargeable unsecured debts, and proposal to pay
the student loan creditors directly at the contract rate, while
only making partial payment on the other dischargeable unsecured
debts through the Trustee, unfairly discriminates in favor of the
student loan creditors and against the other unsecured creditors.
In response to the Objection, Debtor argues that such
classification is permissible under § 1322(b) (5), and that
§ 1322(b) (1) is not applicable to § 1322(b)(5). Alternatively,
Debtor contends that, while such classification discriminates, the
discrimination is not “unfair” under § 1322(b)(1). No creditors

objected to confirmation.

‘Note the difference between the amount of unsecured debt
listed in the debtor’s schedules ($68,333.52) compared to the
actual amount of claims. The claims bar date has passed. Thus,
the amount of claims, rather than the amount in the schedules,
controls.

> ($11,986/$51,057.30)*100 = 23%. This differs slightly from
the 17% Trustee stated at the hearing. The Court was unable to
replicate the Trustee’s exact calculation.

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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Ii.
ANALYSIS

This case presents the following issues: (1) whether
classification of student loan obligations as long-term debt under
§ 1322(b) (5) is subject to the unfair discrimination limitations of
§ 1322(b) (1), and, if so, (2) whether the discriminatory treatment
proposed in Debtor’s Plan is “unfair.”
A. Must a long-term debt classified under § 1322(b)(5) also comply

with § 1322(b)(1)’s prohibition of unfair discrimination?

This is purely a question of law. Section 1322(b) provides, in
pertinent part, that the plan may:

(1) designate a class or classes of unsecured

claims...but may not discriminate unfairly against any

class so designated; however, such plan may treat claims

for a consumer debt of the debtor if an individual is

liable on such consumer debt with the debtor differently

than other unsecured claims.

(5) notwithstanding paragraph (2) of this subsection, ®

provide for the curing of any default within a reasonable

time and maintenance of payments while the case is pending

on any unsecured claim or secured claim on which the last

payment is due after the date on which the final payment

under the plan is due.
11 U.S.C. § 1322 (b).

It is undisputed that (1) the final payments on each of
Debtor’s student loans come due after the final plan payment is
scheduled to be made, and (2) the student loans qualify for

treatment as long-term debt under § 1322(b)(5). Classification

under § 1322(b)(5) permits the debtor to cure any defaults and

° Paragraph (2) of subsection 1322(b) states that the plan
may-- “modify the rights of holders of secured claims, other than a
claim secured only by a security interest in real property that is
the debtor’s principal residence, or of holders of unsecured
claims, or leave unaffected the rights of holders of any class of
claims.” 11 U.S.C. § 1322(b) (2).

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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maintain payments at the contract rate. Debtor is current on the
student loan obligations, and thus seeks only to maintain the
contractual payments over the life of the plan.

Debtor argues that a debt classified as long-term under §

1322 (b) (5) need not comply with the strictures of § 1322(b)(1)
because § 1322(b)(5) is a stand-alone provision -- which may be
used by debtors in structuring chapter 13 plans without reference
to § 1322(b) (1). Specifically, Debtor argues that the language of
subsection (5), which begins: “notwithstanding paragraph (2)”,
should not be interpreted as requiring application of § 1322(b) (1)
simply because paragraph (1) is not expressly excluded. Debtor
maintains that the language excluding paragraph (2) from
application to paragraph (5) specifically refers to the prohibition
on altering the terms of a claim secured by a debtor’s residence,’
and should not be construed as imposing any other limitations on
the use of § 1322(b) (5), by implication or otherwise.

Debtor also asserts that a strong public policy exists in favor
of education, which justifies the disparate treatment of student
loan debt urged by Debtor. The proposed treatment would enable
Debtor to emerge from bankruptcy with a “fresh start.” Debtor’s
bottom-line contention is that any debt classified as long-term
under § 1322(b)(5) may be paid in full at the contract rate during
the life of the plan and that § 1322(b)(1) precluding unfair
discrimination is simply inapplicable. Therefore, according to
Debtor, no analysis of the discrimination imposed on other

unsecured nonpriority creditors by such classification is

7 Section 1322(b)(5) is traditionally used by debtors to
decelerate, cure and maintain payments on defaulted mortgages. In
re Colley, 260 B.R. 532, 535 (Bankr. M.D. Fla. 2000).

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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appropriate.
There is some case support for Debtor’s arguments. A few
courts have permitted discriminatory treatment of the kind Debtor

seeks to impose in this case. In re Foreman, 136 B.R. 532 (Bankr.

S.D. Iowa 1992) (confirming plan separately classifying student
loans and providing for payment of student loan debts concurrently
with secured debts and prior to repayment of other unsecured

debts); In re Dodds, 140 B.R. 542 (Bankr. D. Mont. 1992) (confirming

chapter 13 plan providing for payment of student loans at contract
rate while paying approximately 79% on other unsecured claims); In
re Benner, 156 B.R. 631 (Bankr. D. Minn. 1993) (permitting debtor to
pay 57% on student loans during plan and only 5% to other general
unsecured creditors); In re Cox, 186 B.R. 744 (Bankr. N.D. Fla.
1995) (allowing payment of 42.3% on student loans and only 18% on
other nonpriority unsecured claims); In re Chandler, 210 B.R. 898
(Bankr. D. N.H. 1997) (confirming plan which paid 9.5% to unsecured
creditors, while Debtor paid 56.9% of student loan debt outside
plan). However, even these cases purport to apply § 1322(b)(1) and
instead hold that, as a matter of law, compliance with § 1322(b) (5)
passes unfair discrimination scrutiny. See Labib-Kiyarash v.

McDonald (in re Labib-Kivarash), 271 B.R. 189, 194 (B.A.P. 9th Cir.

2001) (citing Cox, 186 B.R. at 746-747). The Court is unaware of
any case which stands squarely for the proposition that a Debtor
may freely discriminate against other unsecured creditors simply by

classifying a student loan as long-term debt under § 1322(b)(5).8

*The bankruptcy court in In re Christophe, 151 B.R. 473, 480
(Bankr. N.D. Ill. 1993), stated in dicta that the debtor could
classify student loans pursuant to 1322(b)(5) and pay them in full
while providing only 32% to other unsecured creditors withouz

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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While none of these cases expressly holds § 1322 (b) (5)
inapplicable, in light of their lack of analysis of the
discrimination between creditors,’ that is their practical effect.
Debtor’s argument -- that the exclusion of paragraph (2) but
not paragraph (1) from the ambit of 1322(b) (5) should not be read
to support application of paragraph (b)(1) -- has been thoroughly
discussed in previous cases. In light of the doctrine of inzlusio

unius exclusio alterius and the fact that Congress made an explicit

exception in 1322(b) (1) for co-signed consumer loans, the Court
concludes that if Congress had wished to exclude student loans from
scrutiny under 1322(b)(1) it would have expressly done so. jee
Colley, 260 B.R. at 537; Chandler, 210 B.R. at 903.

Debtor’s public policy argument has two components. One is
that the public policy in favor of education supports permitting
Debtor to discriminate to the benefit of the student loan
creditors. The other is Debtor’s “fresh start” argument. Analysis
of any public policy argument must be performed in the context of
the statutory scheme. As one bankruptcy court explained:

Reliance on idealized notions of “fresh start,” divorced

from the very statute that provides that fresh start, is

inappropriate. Congress has created, defined and limited

the fresh start through, inter alia, the Code’s discharges

provisions. Surely, the bankruptcy laws do effect a fresh

start policy. But the same laws significantly limit the

fresh start’s scope.

In re Colfer, 159 B.R. 602, 609-610 (Bankr. D. Me. 1993).

Debtor is certainly correct that there is a strong public

policy favoring education. Whatever the strength of that policy,

violating 1322(b) (1).

"As explained below, infra at 10:2-28, with the exception of
Benner, no other cases attempted such an analysis.

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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however, Congress has specifically made student loan debts non-
dischargeable by enacting § 523(a)(8), and has not specifically
elevated student loan debts in the priority scheme. On the other
side of the coin are the foundational bankruptcy principles of
equal treatment of creditors and strict prioritization of claims.
The public policy arguments Debtor invokes, while somewhat
compelling, have not persuaded other courts. See Chandler, 210
B.R. at 902 (Bankr. D. N.H. 1997); Colfer, 159 B.R. at 609-610; In

re Gonzalez, 206 B.R. 239, 240-241 (Bankr. S.D. Fla. 1997). This

Court is similarly unconvinced.
In addition, some courts have asserted that classification of

the type Debtor proposes, if permitted, would produce anomalous

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results. In re Coonce, 213 B.R. 344 (Bankr. S.D. Tll. 1997); In

re Belda, 315 B.R. 477, 484 (N.D. T1ll. 2004). The Court agrees.

While the Ninth Circuit Court of Appeals has not confronted
this issue, the Ninth Circuit BAP has concluded that a debt
classified as long-term under § 1322(b) (5) must not run afoul of
the prohibition on unfair discrimination under § 1322(b) (1).

Labib-Kiyarash, 271 B.R. at 195; McDonald v. Sperna (In re Sperna),

173 B.R. 654 (B.A.P. 9th Cir. 1994). This is consistent with the

Majority approach. See, e.g., Groves v. LaBarge (In re Groves), 39

F.3d 212 (8th Cir. 1994); Belda, 315 B.R. 477; In re Edwards. 263

B.R. 690 (Bankr. D. R.I. 2001); Colley, 260 B.R. 532; In re

For example, a student loan, with thirty-six monthly
payments remaining could not qualify under § 1322(b)(5) and,
therefore, would have to be classed with all of the other unsecured
creditors. However, an identical obligation with thirty-seven
monthly payments remaining would be entitled to full payment under
the plan without any iniquity as to whether the proposed treatment
was fair.” Coonce, 213 B.R. at 348.

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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Thibodeau, 248 B.R. 699 (Bankr. D. Mass. 2000); Coonce, 213 3.R.

344; In re Sullivan, 195 B.R. 649 (Bankr. W.D. Tex. 1996); Colfer,

159 B.R. 602. Accordingly, the Court answers the first question in
the affirmative, and holds that a long-term debt classified -inder
§ 1322 (b) (5) must also satisfy the prohibition against unfair
discrimination of § 1322(b) (1).
B. Is the discriminatory treatment proposed in Debtor’s Plan
“unfair” such that the Plan may not be confirmed?
The determination whether a proposed classification unfairly
discriminates is within the discretion of the bankruptcy judge. In

re Crawford, 324 F.3d 539, 542 (7th Cir. 2003); Groves, 39 F.3d at

214; In re Williams, 253 B.R. 220, 226 (Bankr. W.D. Tenn. 20390);

Dodas, 140 B.R. at 544. To determine whether discrimination is
“unfair” under § 1322(b)(1), the courts in this circuit apply the

test enunciated in AMFAC Distribution Corp. v. Wolff (In re Wolff),

22 B.R. 510 (B.A.P. 9th Cir. 1982). Labib-Kivarash, 271 B.R. at
195. The burden is on the debtor to show that the proposed
classification does not unfairly discriminate against other
unsecured creditors. Labib-Kiyarash, 271 B.R. at 195. To satisfy
the Wolff test: (1) the discriminatory treatment must have a
reasonable basis; (2) the debtor must be unable to carry out a plan
without the discriminatory treatment; (3) the discrimination must
be proposed in good faith; and (4) the degree of discrimination
must be directly related to the basis or rationale for the
discrimination. Wolff, 22 B.R. at 512.

Debtor contends that the discriminatory treatment proposed in
this case -- payment of approximately 39% to student loan creditors

during the Plan term, and 6% on other general unsecured claims --

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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does not unfairly discriminate within the meaning of § 1322(>) (1).
Most of the cases that support this argument do not conduct any
analysis of the discriminatory treatment to determine whether or
not it is unfair, and thus are unhelpful. See, for example,
Chandler, 210 B.R. at 903-904 (purporting to apply both 1322 (b) (1)
and 1322(b) (5), but simply approving of debtor’s proposed
classification of student loans under 1322(b) (5) without analyzing
or determining fairness); Cox, 186 B.R. at 747 (stating that an
analysis of fairness was unnecessary because 1322(b)(5) “prevents a
finding of unfair discrimination in this case as a matter of law,”
despite the court’s insistence that 1322(b) (1) applied). The
Benner court, although technically in agreement with Chandler and
Cox, did conduct an inquiry into the fairness of the
discrimination. Applying the Eighth Circuit’s test for unfair

discrimination, which is identical to the Wolff test, set forth in

Mickelson v. Leser (In re Leser) 939 F.2d 669 (8th Cir. 1991), the

bankruptcy court found that the proposed discrimination was ot
unfair. However, in conducting its analysis, that court found that
the first factor in the Leser test (that the basis for
discrimination be reasonable) was satisfied because the student
loan debt was not dischargeable and the debtor desired to obtain a
fresh start at the end of the chapter 13 case. Benner, 156 3.R. at
634. This is contrary to the conclusion reached by the majority of
courts -- i.e., that the non-dischargeability of student loans, by
itself, is insufficient to justify different treatment. Groves, 39
F.3d at 216; Labib-Kivarash, 271 B.R. at 195-196; Sperna, 173 B.R.

at 658; Cox, 186 B.R. at 746; In re Saulter, 133 B.R. 148, 149-150

(Bankr. W.D. Mo. 1991)

MEMORANDUM DECISION
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Accordingly, there are effectively no published opinions
holding that a proposed discrimination in favor of student loans

Classified under § 1322(b)(5) is, ipse dixit, “fair” under §

1322 (b)(1).™

Applying the Wolff factors to this case, it is impossible for
the Court to conclude that Debtor’s Plan passes the test, given the
current state of the record. Neither party has submitted a
declaration in support of its position, and no testimony was
offered at the hearing on this matter. Accordingly, the Court is
unable to analyze the Wolff factors. It is the Debtor’s burden to
prove that the proposed classification does not unfairly

discriminate against other unsecured creditors. lLabib-Kivarash,

271 B.R. at 195. This burden has not been met.
The Court notes the widespread criticism of the efficacy of the

Wolff test in this context. See Bentley v. Boyajian (Tn re
Bentley), 266 B.R. 229, 238 (B.A.P. Ist Cir. 2001); McCullough v.

Brown (In re Brown), 162 B.R. 506, 509-515 (N.D. Ill. 1993);

Colfer, 159 B.R. at 607-608. Attempts have been made to develop a
more meaningful test for determining whether discrimination among

Similar creditors is fair under 1322(b)(1). See In re Brown, 152

B.R. 232, 238 (Bankr. N.D. Ill. 1993), rev'd, 162 B.R. 506 (N.D.

' Chandler cited numerous cases for the proposition that.
1322 (b) (5) may be used to justify treating student loan creditors
differently from other general nonpriority unsecured creditors.
Chandler, 210 B.R. at 904. This included Cox, Benner, Saulter, In
re Anderson, 173 B.R. 226 (Bankr. D. Colo. 1993), and In re
McKinney, 118 B.R. 968 (S.D. Ohio 1990). The Saulter and Anderson
courts both denied plan confirmation on the grounds that the
proposed treatment constituted unfair discrimination. The MzKinney
case was filed prior to the amendments to the Code which made
student loan debt non-dischargeable.

MEMORANDUM DECISION
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Ill. 1993) (proposing a test inquiring into whether the
discrimination furthers a legitimate interest of the debtor): In re
Chapman, 146 B.R. 411, 419 (Bankr. N.D. Ill. 1992) (examining
whether discrimination provides offsetting benefit to those
creditors subject to the discrimination); Colfer, 159 B.R. at 608-
611 (proposing an analysis of the merits of the discrimination
“undertaken in light of the impact of the discrimination on
Congress’ chosen statutory definition of the legitimate interests
and expectations of the parties-in-interest to Chapter 13
proceedings”). None of these alternatives to the Wolff test has
gained significant momentum. See In re Etheridge, 297 B.R. 3810,
815-816 (Bankr. M.D. Ala. 2003) (setting forth the different tests
for determining fairness and declining to adopt any single one,
stating that the determination should be made on a case-by-case
basis) .**

CONCLUSTON

Although Debtor’s Plan is not unconfirmable as a matter of law,
it may not be confirmed on the current record. The discriminatory
treatment proposed in the Plan could potentially be deemed fair
under 1322(b)(1) if the specific facts of this case satisfied the
Wolff test.

Due to the insufficient record before the Court, Trustee’s

the Debtor has not suggested that the Court adopt any of the
alternatives to the Wolff test. Given the incomplete factual
record before the Court, it is unnecessary for the Court to decide
whether Wolff continues to provide the appropriate test of fairness
for the purposes of 1322(b) (1), and it declines to do so at this
time. Should the Debtor choose to supplement the record
sufficiently to argue that this Plan satisfies the fairness inquiry
under 1322(b) (1), the Court will then revisit the question of
Wolff’s viability.

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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Objection is sustained, and confirmation of Debtor’s Plan is denied
without prejudice. The Trustee shall submit a form of order so

providing, after review by Debtor’s counsel as to form.

Dated:

wlio Oe ee

ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JJDGE

MEMORANDUM DECISION
SUSTAINING OBJECTION TO CONFIRMATION

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Court Service List

Cathleen Cooper Moran, Esq.
Moran Law Group, Inc.

1674 N Shoreline Blvd. #140
Mountain View, CA 94043-1375

Eva Alexandra Delateur, Esq.
Office of the Chapter 13 Trustee
P.O. Box 50013

San Jose, CA 95150

Office of the U.S. Trustee
U.S. Federal Bldg.
280 S Ist St. #268
San Jose, CA 95113-3004

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